There are two overriding themes that are important to understand in analysis of the Canadian Dollar from a fundamental point of view. Firstly, as its portrayal as a commodity currency suggests, it is a fact that exports of natural resources (especially gold and oil) form a noteworthy part of the Canadian economy. This is important to understand due to the fact that as Canada is the world’s 14th largest producer of oil and 5th largest producer of gold, the price of these and other commodities generally have a direct influence on the Canadian Dollar’s Exchange rate.
Secondly, it is important to understand here that the fact that the Canadian population is relatively small in comparison to its land mass, the economy relies heavily on exports, which links the country more closely with the international economy. This is especially the case with regards to the economy of the United States, as the US is Canada’s largest trading partner with 81% of Canadian Exports going to the US.
Despite the fact that it is common opinion that the US relies most heavily on the Middle East for its oil imports, it is in fact Canada that acts as the biggest supplier of oil to the United States. With the US being the world’s largest oil consumer and Canada being one of the largest oil producers, variations in the price of oil have twice the impact. As covered previously in our discussion on trade flows, due to the fact that the US is a net oil importer and Canada is a net oil exporter, then all else being equal, any rise in the oil prices should strengthen the CAD and weaken the USD.
It should be noted however, that the service industry has experienced huge growth in recent times and now makes up approximately 2/3rds of Canada’s economic output. So whilst commodities exports are still a key part of the Canadian economy it is important to understand that due to the fact that the US is still the country’s largest trading partner, any slowdown in the US economy can have an adverse effect on the Canadian currency and its economy, even if commodity prices remain high.